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Trust-Based Trade

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Author Info
Luis Araujo
Emanuel Ornelas

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Abstract

Weak enforcement of international contracts can substantially reduce international trade. Wedevelop a model where agents build reputations to overcome the difficulties that thisinstitutional failure causes in a context of incomplete information. The model describes the interplay between institutional quality, reputations and the dynamics of international trade.We find that the conditional probability that a firm will stop exporting decreases and itsforeign sales increase as the firm acquires greater export experience. The reason is that theinformational costs that an exporter faces fall as the exporter becomes more confident about the reliability of its distributor. An improvement in the institutional quality of a country affects its imports through several distinct channels, as it changes the incentives of bothcurrent and potential exporters. Trade liberalization induces current exporters to increase their sales. It could induce entry as well, but this will happen only when the initial tariff is high and/or the institutional quality of the country is low.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0820.

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Date of creation: Aug 2007
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Handle: RePEc:cep:cepdps:dp0820

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Related research
Keywords: International trade Export dynamics Contract enforcement

Other versions of this item:

Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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  1. James Anderson & Leslie Young, 2006. "Trade and Contract Enforcement," Contributions to Economic Analysis & Policy, Berkeley Electronic Press, vol. 5(1), pages 1574-1574. [Downloadable!] (restricted)
  2. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  3. Dani Rodrik, 2000. "How Far Will International Economic Integration Go?," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 177-186, Winter. [Downloadable!] (restricted)
  4. Chisik, Richard, 2003. "Export industry policy and reputational comparative advantage," Journal of International Economics, Elsevier, vol. 59(2), pages 423-451, March. [Downloadable!] (restricted)
  5. Ghosh, Parikshit & Ray, Debraj, 1996. "Cooperation in Community Interaction without Information Flows," Review of Economic Studies, Blackwell Publishing, vol. 63(3), pages 491-519, July. [Downloadable!] (restricted)
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  6. Watson, Joel, 2002. "Starting Small and Commitment," Games and Economic Behavior, Elsevier, vol. 38(1), pages 176-199, January. [Downloadable!] (restricted)
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  7. McLaren, John, 1999. "Supplier relations and the market context: A theory of handshakes," Journal of International Economics, Elsevier, vol. 48(1), pages 121-138, June. [Downloadable!] (restricted)
  8. Overman, Henry G. & Rice, Patricia & Venables, Anthony J., 2008. "Economic Linkages Across Space," CEPR Discussion Papers 6786, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June. [Downloadable!] (restricted)
  10. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships And Informal Credit In Vietnam," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1285-1320, November. [Downloadable!] (restricted)
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  11. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
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  12. Izquierdo, Alejandro & Morisset, Jacques & Olarreaga, Marcelo, 2003. "Information Diffusion in International Markets," CEPR Discussion Papers 3872, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December. [Downloadable!] (restricted)
  14. Choi, E Kwan & Harrigan, James, 2004. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  15. Eaton, J. & Fernandez, R., 1995. "Sovereign Debt," Papers 37, Boston University - Department of Economics.
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  16. Woodruff, Christopher, 1998. "Contract enforcement and trade liberalization in Mexico's footwear industry," World Development, Elsevier, vol. 26(6), pages 979-991, June. [Downloadable!] (restricted)
  17. repec:rus:hseeco:121669 is not listed on IDEAS
  18. James E. Rauch & Vitor Trindade, 2003. "Information, International Substitutability, and Globalization," American Economic Review, American Economic Association, vol. 93(3), pages 775-791, June. [Downloadable!] (restricted)
  19. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May. [Downloadable!] (restricted)
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  20. Rauch, James E. & Watson, Joel, 2003. "Starting small in an unfamiliar environment," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 1021-1042, September. [Downloadable!] (restricted)
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  21. Egan, Mary Lou & Mody, Ashoka, 1992. "Buyer-seller links in export development," World Development, Elsevier, vol. 20(3), pages 321-334, March. [Downloadable!] (restricted)
  22. repec:rus:hseeco:123708 is not listed on IDEAS
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